There’s a Crisis in the Housing Market (Something Big Is Happening)

Home builders just went into crisis mode. Does this mean that home prices are about to crash? I'm gonna reveal the answer to you in one simple, fast step. Step number one, let's go over financial engineering gone wild. As you guys probably guessed, this could be the catalyst to the next downturn in the housing market. All right, we start with a chart from right around today's date, depending on when you're watching this video. We go all the way back to call it August 25th, August 26th. On the left, we go from $120 up to 145. What is this? This is the share price for Lenar. We're going to use them as a proxy for home builders in general. And you can see right here, they peak out around, what was that, the sixth? Call it 140, 145 bucks. And we go straight down till we get to their earnings report, which was catastrophic. And as a result, their share price plummets. We get the old wily coyote. No! And when I say catastrophic, unfortunately for them, I'm not exaggerating. Their profits were down 46%. And it was a result of this financial engineering starting to catch up with them. Let me show you what I'm referring to. See, Lenar and a lot of these home builders were trying to prop up the price of homes, even though the people they were selling them to couldn't afford the monthly payments. See, they didn't want to bring down the home prices because that impacts the comps. We'll go into that more in just a moment. So what they were doing, well, they were doing a lot of financial engineering, but one of the main things they were doing, something called an interest rate buy-down. So let's just assume for a moment they sell a house for 500,000, but the people that they're selling to cannot afford a $500,000 house. So what they do, and these are just round numbers. These aren't exact. I'm just using them for the sake of the example. What they do is they give them an interest rate buy-down of $100,000. Now that comes out of the pocket or the profit margin for Lenar. And what this does is it reduces the interest rate because basically Lenar is paying it instead of the homeowner and therefore the monthly payment. But in most cases, it only does it temporarily. I'm sure you guys can see where this is going, but we'll discuss that more in just a moment. So basically what's happening is although the sale price of the home is 500,000, Lenar, at the end of the day, is really only selling it for 400,000. And the 100,000 is coming directly out of their margins, which is what they had to admit to right around here, which is why their share price just took a nosedive. Now, can they continue this indefinitely into the future? Well, you guys know the answer to this. Absolutely not. Because what they're doing is they're losing money on every transaction and trying to make it up in volume. Now, I'm not saying that they are losing money. That's just a very common saying. I'm sure you guys have heard it many times. But the bottom line here is they cannot continue to reduce their margins. At a certain point, they have to wave the white flag. Well, what are they gonna do if the home buyers can't afford the 500,000? Eventually, they're gonna have to actually drop the listing price, the sales price that affects comps, which could impact the housing market more broadly. But before we get into that, Editor, let's cut right to the internet because I wanna show you exactly what's happening from Lenar's website. Okay, here we are on Lenar's website. And this was just the first city that just popped up. I didn't specifically look for a city that, let's say, illustrates my point very well. This was totally random, I swear. So we're here in Houston, Texas. And when you think about Texas, you think of a market and a state where the economy is doing pretty well, relatively speaking, or maybe better than some other states. So we see some of these homes they're selling. And again, this is Lenar. And we've got 500,000, 550, okay, moving ready. Looks great, right? So if they sell this home, let's say this one, for 495,000, then that would impact the comps. And that would impact the values for the other homes in that area. You guys know how it works. But let's keep scrolling down. Because like I said earlier, at a certain point, you can't reduce the margins anymore. And if you're paying money out of pocket, you the home builder, to do these interest rate buy-downs, then there's no more money left in the kitty. There's no more profit. And then you have to sell at a loss. And then what you have to do is you have to drop your prices as quickly as you can in order to move that inventory because you can't allow it to sit on your balance sheet. Okay, so let's keep going here. And I had no idea they were actually doing this until I went to their website and I started to scroll down. And I'm like, oh, wow, minus 38,000. Now I'm like, okay, and I've never really been on a home builder's website. So I'm like, I wonder if that's the interest rate buy-down or they're actually dropping the price. They're dropping the price. You see my point here, guys? Is we've gotten to that tipping point, if you will, where these home builders, they can't eat any more margin. And they don't have a choice, but to start to drop those prices, which again will impact the home values of everyone else around them that own a home. Let's keep going here. This one, they dropped the price so far by 38,000. This one is only 210,000 to begin with. And they dropped the price by 76,000. $76,000. I don't know what that is in terms of a percentage drop, but it's huge. It's massive. You guys can do the math on that one. Look at this one. This one isn't even, well, I don't know if it's built. It says the images are coming soon. So I would assume that possibly it's not even built yet. And they're asking 190,000, and this is with a $52,000 drop. And we're talking about what, like 20% roughly that they're dropping the price? And it's still not selling. Look, we keep going down and it's more of the same. Price drop, 39,000, 46,000, 34, 43, 67, 75, I mean, it's not like I'm cherry picking here. The vast majority of the homes listed on their site have significant price drops. And I'm assuming this is a more recent phenomenon. I know these buybacks or these buydowns have been a thing for quite some time, especially over the last five years since interest rates have gone up. But I think the price drops are more recent. So then obviously the next question becomes when is this going to impact the overall prices of the homes in that area? That's what I wanna get into next. Okay, now let's get back to the main question here. How is this gonna impact home prices? And are they going to crash? Well, there are no certainties. There are only probabilities. But when you look at everything that's happening in the economy and in the housing market, I don't know how the probabilities or your base case is that home prices are gonna continue to go up forever. Let me show you what I'm referring to. So we've got, everyone's favorite right here, Moody the Millennial. And I don't know their preferred pronouns. So we'll just call them them, or they, or whatever you call them. And they've got their blue hair. Now, Moody actually bought a home a couple of years ago and Moody bought it for, let's just say 490, something like that. So they have had a little bit of appreciation. Their home is currently valued at 500,000. Now, why is it valued at 500,000? Because the other homes in the neighborhood have sold for 500,000, or the like home, the comparable homes. And then we go over here to the average Joe. Now he's in the same position as Moody. He's owned his home maybe a little longer. Let's just say since 2018 or 19. So maybe he paid about 400,000. So now he's up $100,000. That is fantastic. So what is Joe going to do? He's gonna look at all of those gains, at least paper gains, and he's gonna feel richer. So he's gonna go out in the economy and spend more. Maybe he might even take out a home equity loan to go ahead and go on that vacation or buy that car or do something that's going to contribute to economic activity. Okay, more on that in just a moment. But then we've got this guy in the middle. Your friend and family member, Fred. Everyone has a Fred in their social circle. And he is the guy that tells you to never ever watch those George Gammon videos. Absolutely not. George is way too bearish all the time. If you would have listened to George, you would have missed out on all these gains with the stock market. Nevermind the fact that he's purchased gold in his portfolio and gold is up way more than the S&P 500. And then he's the guy that whenever you get a little hesitant on home prices in the real estate market in general or the economy, is like, oh, you're just spreading FUD. Oh, you've just got to go in there and buy. Everyone knows that home prices always go up. And everyone knows that the S&P 500 just always goes up. Now, unfortunately for Fred, he does not think in terms of probabilities. No, no, no, no, no. He thinks in terms of certainties. And right now, Fred is certain the housing market is gonna continue to go higher and higher and higher and higher and higher and higher forever to infinity and beyond, as Buzz Lightyear says. So what he does is he stretches his paycheck as far as he possibly can. He says, okay, well, oh, maybe I can afford, I don't know, a $2,000 a month mortgage payment. I'm just using round numbers for the sake of the example. So he goes to Lenar and he says, well, I can afford $2,000 a month. And they say, well, unfortunately, Fred, that's not gonna be able to get you in this home that's priced at 500,000. But maybe what we can do is we can do an interest rate buy-down. Because the only reason that you can't afford this $500,000 home has nothing to do with the fact that, I don't know, you don't have a high-paying enough job. No, no, no, no, no. It only has to do with the fact that these stupid interest rates are so high. Even though, historically speaking, they're still pretty low. But it's all because of this interest rate. So if we can just lower the interest rate, then that $2,000 a month can get you in to this house that's $500,000. And now Fred says, okay, well, I would never, ever, ever watch a George Gammon video. But unfortunately, my cousin watches them all the time. And I heard George saying, I don't know, something about the fact that these buy-downs are only temporary. That's right. Usually, they only last maybe two or three years. So what happens if, after the buy-down, the mortgage payment goes up above $2,000 and I can't afford it anymore? And then the seller says to your friend and family member, Fred, that's a little bit gullible, obviously, says, oh, don't worry about that. In two or three years, the Fed will have dropped interest rates. And then you can go ahead and refi, probably at a lower rate, and bring your mortgage payment down from $2,000 a month to $1,800. But what the salesperson isn't telling Fred, and they probably don't even know, is that we could, I don't know, in two, three years, what happens if inflation goes back up? Now, I don't know that it's my base case, but it's not off the table, especially when we saw how crazy the central planners were during the Cervasas sickness, which destroyed global supply chains, which even if M2 money supply wouldn't have shot up, we still would have had massive price increases, which most likely would have taken interest rates up at the long end of the curve. In other words, mortgage rates would have gone higher. So this is always a possibility. But then what about the labor market? See, what the salesperson isn't telling your friend and family member Fred is that interest rates don't control the economy. Interest rates are a reflection of what's happening in the economy. So if we have lower interest rates, okay, fine, but Fred might not have his job because if the Fed drops interest rates back down to whatever, zero, 1%. And if you see the 10-year treasury going down by two percentage points, which brings mortgage rates down, that implies that the labor market is going to be weakening, to say it mildly. That means that the unemployment rate is most likely skyrocketing, which again could impact Fred's job. So if Fred is unemployed, I don't care what type of interest rate he can get, he ain't gonna refinance and he's gonna be in the position where he has to sell the home. And if this sounds familiar, it should, because this is exactly, and this is the key here, what happened prior to the GFC and one of the big contributing factors to the global financial crisis, and they were adjustable rate mortgages. So what we're doing here, I don't care if it's a fixed rate loan, effectively, it is an adjustable rate mortgage. Because sure, your payment's two grand right now, but after three years, it's very likely that it could go up to 3,000, who knows. So now let's think through the next step. If Fred has to sell his home because he no longer has a job, or he can't refi at a lower interest rate, he's gonna be able to sell for the market rate. In other words, what the other buyers can afford or what they're willing to pay. But remember, Fred isn't Lenar. He can't do an interest rate buy-down. So he's gonna have to drop the price of the home to sell it to the next guy at that mortgage payment that he can afford. So he's gotta drop his home price from 500 all the way down to 400,000, which he isn't going to be able to do. Most likely, this house goes back to the bank, foreclosure. And why would it be tough for him to sell it 400? Because he's upside down. He owes more on the loan than the value of the home. But let's go back to Moody the Millennial. Remember, they bought for 490,000. Well, because Fred had to buy or sell his house or give it back to the bank, because the price goes from 500 down to 400, which is the actual market price when you exclude the interest rate buy-down, artificially propping the price up to 500, now all of a sudden, this impacts the value of Moody's home. So much so that, whoa, whoa, whoa, whoa. Wow, Moody must really be pissed. They actually dyed their hair red from blue just to show how pissed off they actually are. And why is Moody pissed? Because the value of their house went down to 400,000 because it's all about the comps. So Fred had to fire sell, or the bank had to fire sell at 400,000. Therefore, this becomes the comp for this house and this house. But remember, Moody paid 490 grand, so now they are upside down. They have negative equity, which puts them in a very compromising position, especially if they lost their job or their side hustle as well. Well, what's Joe doing? Well, he's obviously spending a lot less money because although he doesn't have negative equity, he doesn't feel as rich as he did back here. And therefore, he's spending less money into the economy, which overall, if a lot of Joes are out there doing the exact same thing combined with the Freds and the Moody's means an economic contraction, or at the very least, an economic headwind, which could lead to a recession. So Moody's pissed, Fred is sitting there crying, saying, well, I should have watched more of George Gammon's videos. And Joe is pissed off as well. But let's not forget about the home builders. If Fred would not have purchased the home to begin with, they still have this inventory on their balance sheet like we were talking about earlier. What are they gonna have to do? They're gonna have to drop the price just to get that supply moving. And even if they have to take a hit, even if they have to take a loss on the individual transaction, which basically does the exact same thing, taking the overall values in the neighborhood from 500 down to 400. So are home prices going to crash? I have absolutely no idea. They could go up for the next 10 years. But we're playing a game of probabilities. That's the key lesson to this entire video. So whether you're analyzing the housing market or the stock market, you have to look at the prices relative to incomes, all the valuations, all the fundamentals, and then you have to come to a conclusion as to what the probabilities are that home prices going into the future go up or down. And my personal opinion is that the odds favor home prices going down over the next few years, especially, especially when you adjust for inflation. Now, if you're worried about the housing market being a little shaky, or maybe the S&P 500 being at nosebleed levels, I'd strongly encourage you to check out Rebel Capitals Pro. We'll go ahead and put a link in the description below. This is the private investment community I have with my good friends, Lynn Alden and Chris McIntosh, where we give you contrarian strategies, contrarian stock picks, and mentorship that help you really navigate these insane times. Our goal there is to give you the tools you need to not only protect your wealth, but grow your wealth in this crazy world we live in of out of control central banks and big governments. So again, if you wanna check that out, put a link in the description below.